Confusing What & Why

The holidays are actually a great time to reflect on the lessons they can teach us related to our finances – whether that is regarding what matters most to us, aka “our why’s,” to emotionally charged spending and subsequent regrets. This week’s video discusses the importance of not letting our “what’s” keep us from fulfilling our “why’s.”

Five Things You Should Know

Equity Markets – were lower this week with U.S. stocks (S&P 500) down -3.35% while international stocks (EAFE) fell -1.19%.
Fixed Income Markets – were lower with investment grade bonds (AGG) down -0.51% while high yield bonds (JNK) fell -0.78%.
Zero Covid Zero – under intense scrutiny and protests, the Chinese government has decided to officially scrap its long-held Covid Zero policies. After the country witnessed some of the largest and loudest protests against the government in recent memory, the National Health Commission will set out 10 new measures to combat infections. Mandatory centralized quarantine camps will be abolished, and mass testing will be scaled back. The news this week gave Chinese markets a temporary bump.
Election Season Over – on Tuesday, the 2022 mid-term elections finally ended as the Georgia Senate runoff election concluded with incumbent Democrat Raphael Warnock defeating Republican challenger Herschel Walker. 51-49 will be the number in the Senate as Democrats pick up one seat and extend their margin. A slight edge will remove the Vice President as the tie-break vote and give less power to centrist Democrats who may hold up the party’s agenda.
Key Insight – [VIDEO] The holidays are actually a great time to reflect on the lessons they can teach us related to our finances – whether it's regarding what matters most to us, aka “our why’s" to emotionally charged spending and subsequent regrets. This week’s video discusses the importance of not letting our “what’s” keep us from fulfilling our “why’s.” [ARTICLE] We help unpack the futility of putting too much weight into predictions, as well as address some of the bias’s that led to that futility and how to use.

Insights for Investors

Intro

As we discuss a bit in this week’s video “what’s” often get in the way of addressing our true “why’s” as investors. One such “what” that fascinates people is what the future holds. With the end of one year and the beginning of a new year, the annual traditions of predictions and prognostications are upon us. If you are looking for some fun reading, by all means do so, but try not to let the countless articles with what 2023 will hold induce you to get off track.

The Current State of Predictions

Let’s be clear, we are not calling anyone who engages in the “prediction” game any names. These are smart people, and many are engaging in the process far more in the vein of hazarding a guess than trying to make a true prediction.

The fact that most the people being surveyed/quoted are smart and informed people is important to note as you consider the wide range of opinions that are out there at any given point of time. The chart below shows the current range in predicted levels for the S&P 500 which is at levels not seen since the Great Financial Crisis. Even among market strategists surveyed, there is OVER a 30% gap in their predictions.

Of course, if anyone really knew what lie ahead with any regularity, the press wouldn’t bother to continue to ask anyone else…but no one does.

Why is this?

The Problem of One’s Area of Focus

John Authers of Bloomberg highlighted one way to explain the range of opinions out there, which is that one’s view could be heavily influenced by looking too specifically at one sector and losing sight of the big picture. Liz Ann Sonders makes this point indirectly in her preview of 2023, written with Kevin Gordon, saying, “Although the pain in different segments of the economy gets extended over a longer period of time, you have positive offsets relative to the areas where there’s weakness... So different pockets are getting hurt at various time going in their own little bear markets, but you had offsetting strength elsewhere.” Her notion of a “rolling” recession is a sector-by-sector downturn, rather than one big one wherein everything collapses.

We see this in our world regularly where a client’s “outlook” on the economy or market is unduly influenced by their circumstances, business, or industry.

The Problem of Mixed Time Frames

Another issue with predictions is the vagary among predictions or the listeners inability to grasp the timeframe the “prediction/outlook” is referencing.

While there is no sure-fire way to predict the future, different analytical takes can help explain the range of probabilities, but it’s important to note their usefulness is strongly related to much different timeframes. Technical analysis has some use in shorter timeframes and so much of it guides machine-based trading. Quantitative analysis has more usefulness and is looking at things 6-18 months out. While Fundamental analysis (think Warren Buffett) is more about investing long-term or at least through a complete economic cycle.

Point being, while your portfolio should not be based on predictions in general, your decisions certainly shouldn’t be based off insights that may have nothing to do with the timeframe that relates to your plan or a given position.

The Set Up Today

While the press, and many retail investors, remain very bearish, Bloomberg noted this week that, “Professional investors overseeing a total of $5 trillion are loading up on bets that a recession can be avoided, according to a study from Goldman Sachs. The positions amount to wagers that the Federal Reserve can tame inflation without creating a recession, often referred to as an economic soft landing. “Current sector tilts are consistent with positioning for a soft landing,” Goldman strategists including David Kostin wrote in a note Friday.”

There is good reason to believe a soft landing may lie ahead, with Torsten Slok of Apollo noting, “Inflation is coming down without a major increase in the unemployment rate, see charts below. That is the definition of a soft landing."

One last note on the current environment and a quite common talking point right now. There is a lot of talk these days about the inverted yield curve and related insinuations of impending doom around the “inevitable” recession that should follow consequently. As the saying goes, history may not repeat itself, but it often rhymes.” This issue we take with many pundits’ outlooks is that they are drawing parallels between the depth of the yield curve inversion and interpreting it in such a way as to suggest that it correlates to the depth of the recession. As the quote above suggests, no two circumstances are the same and neither are any two recessions. So, while an inverted yield curve is strongly correlated with a recession (which by the way we may already be in) it is not helpful in determining what kind of recession it will be.

Scott Grannis highlighted a number of differences between today’s environments and others stating, “…while an inverted yield curve has indeed preceded every recession, so have other indicators: e.g., very high real yields, high swap and credit spreads, and rising unemployment claims. None of those other indicators are flashing recession signals right now. Plus, the current Fed tightening cycle is very different this time than at any other time before. The Fed no longer drains liquidity in order to push short-term rates higher, and that means a lot less pressure on the banking system. Liquidity today is in fact still abundant … Yes, today the curve is very inverted, but real yields are not particularly high …Low spreads suggest the market is relatively confident about the outlook for corporate profits and that in turn implies the outlook for the economy is healthy.”

As we touched on last week, it is great to be informed and understand the various viewpoints of thoughtful people – just stay very cognizant of the limitations of any one person’s ability to predict too much or too far.

Have a wonderful weekend,

Tim and the team at TEN Capital

Data, Just the Data

Data points this week included:

U.S. Jobless Claims – bumped up by 4K to a reading of 230K claimants for the week ending December 3^rd. This was in line with market forecasts and is still showing a healthy labor market. The four-week moving average edged up to 230K, which is the highest level since August of this year.
U.S. Balance of Trade – the international trade deficit has widened to a four-month high of ($78.2B) for the month of October. This follows a deficit of ($74.1B) from the previous month and is lower than forecasts of ($80B). Exports fell (0.7%) to $256B and marks the lowest value since May. Imports rose 0.6% to ($334.8B), which is the highest reading since June thanks to oil purchases and travel.
U.S. PPI Final – the Producer Price Index final demand edged up 0.3% MoM in November, which marks the same reading as both September and October. Service cost is up 0.4%, which is the biggest rise in three months. Cost of goods slightly moved up 0.1% as offsets for the 38% rise in prices for vegetables were found in the decline of gas prices, amongst others. YoY producer prices are up 7.4% and excluding food and energy prices are up 6.2%.
U.K. PMI Composite – remained unchanged at 48.2 for November and was fractionally lower than forecasts of 48.3. This marks the fourth consecutive month of private sector output. The service sector activity fell slightly as manufacturing output dipped at a far faster rate. Input costs eased, dipping to the lowest level in months for manufacturing but could not be said the same for services.
Eurozone Retail Sales – fell by (1.8%) MoM in October and is a stark contrast from the previous month’s reading of a 0.8% rise. This is the largest single month decline since December 2021 as high borrowing costs, and persistent inflation have put downward pressure on consumer spending. Non-food products fell (2.1%), while fuel sales increased by 0.3%. YoY, retail sales have fallen (2.7%).